Religious Institutions Update: May 2012

Timely Topics

“Disqualified” is never a word we like to hear. In the context of nonprofit tax law, it bears special attention. IRS regulations state that a “disqualified person” is “any person who at any time during the five-year period ending on the date of an ‘excess benefit transaction’ was in a position to exercise substantial influence over the affairs of the tax-exempt organization, or any family member of such a person.” An “excess benefit transaction” is, in essence, one where a tax-exempt organization provides to a disqualified person an economic benefit that exceeds the value received from the person. Payment of compensation and many transactions, such as the sale or even use of an organization’s assets, can result in an excess benefit if it is for less than fair market value.

Those in a position to exercise substantial influence over a tax-exempt organization are not hard to spot. Typically, they are the so-called “insiders”: members of the governing board, chief officers and their family members. Often, but not always, they are the most highly compensated employees in the organization. Before your organization transfers something of value to such a person, consult with church-state tax counsel. “Intermediate sanctions” in the form of excise taxes equal to 25 percent of the amount of the excess benefit may apply both to disqualified persons who receive an excess benefit and the organization’s decision-makers — including officers, directors or trustees who authorize an excess benefit transaction.

Key Cases

Instructor States Claim for Pregnancy Discrimination against Parochial Schools

In Dias v. Archdiocese of Cincinnati, Case No. 1:11-CV-00251, 2012 WL 1068165 (S.D. Ohio Mar. 29, 2012), a technology coordinator for two parochial schools who oversaw the schools’ computer systems and instructed students on computer use stated a claim for pregnancy discrimination and breach of contract against the Archdiocese of Cincinnati when she was terminated after becoming pregnant through artificial insemination when unmarried. The court found the ministerial exception to employment discrimination inapplicable because the plaintiff was not a ministerial employee. The schools did not hold her out as a minister; did not give her a religious title or commission; did not review her ministerial skills; and never charged her with teaching the faith, participating in religious services or leading devotional exercises. She never underwent religious training or held herself out as a minister; nor did she, as a non-Catholic, teach Catholic doctrine. The court said it was “not enough to generally call her a ‘role model,’ or find that she is a ‘minister’ by virtue of her affiliation with a religious school.” The court held that the contracts she signed made no reference to prohibiting artificial insemination. The court agreed that the defendant’s contention that she engaged in bad faith by signing such contracts depends upon proof that the plaintiff knew that such conduct was against the teachings and philosophy of the church. With respect to pregnancy discrimination, the court indicated that there was a genuine issue of fact as to whether the defendant enforced its policy solely by observing the pregnancy of its female teachers, which would constitute a form of pregnancy discrimination. In addition, the court implied that if the facts proved that she was dismissed due to artificial insemination, this could be pregnancy discrimination per se.

Church Injunction against Protesters and Posters Partially Affirmed

In St. John’s Church in the Wilderness v. Scott, No. 11CA0508, 2012 WL 1435945 (Colo.App. Ap. 26, 2012), the appellate court held that the trial court did not abuse its discretion (1) in prohibiting protesters from entering the church’s property, and (2) by enjoining the use of large posters depicting mutilated fetuses in a manner reasonably likely to be viewed by children. The court did strike the portion of the injunction enjoining speech that caused church parishioners to become physically upset, on the grounds it covered little or no additional conduct not already prohibited. The injunction was issued after the defendants demonstrated their opposition to abortion and homosexuality on the public street and sidewalk across the street from the church during an outdoor Palm Sunday service. Children who were present were upset and many parishioners declined to participate in a second outdoor service. The court found that, although the injunction’s prohibition against posters was subject to strict scrutiny, the government had a compelling interest in protecting children from disturbing images. As a result, it concluded that the prohibition is narrowly tailored.

Grocery Store Enjoins Church from Soliciting on Its Premises

In Ralph’s Grocery Co. v. Missionary Church of the Disciples of Jesus Christ, Case No. B231005, 2012 WL 1415790 (Cal. App. Ap. 25, 2012), the court affirmed summary judgment and an injunction in favor of Ralph’s Grocery Co. on its trespass lawsuit against a church whose members, in order to solicit donations, regularly placed themselves in front of the entry/exit doors on a private sidewalk/apron between the storefront and fire lane — without first seeking permission from store management or attempting to comply with the store’s rules for expressive activity. The church argued that it had an unfettered right to use the area in front of the grocery store to solicit donations and claimed that the area was a public forum. But the court held that there was no relation whatsoever between the church’s expressive activities and the grocery store location. The court also ruled that the church had no obvious grievance against the store at all, so it had no reason to choose the store over myriad other locations where members could congregate for the same purpose. Furthermore, the court held that the church presented no evidence concerning the attributes of the store that any part should be deemed a public forum, whereas the store showed the opposite that the activity interfered with customer traffic and fire lane safety.

Churches State RLUIPA and Other Claims against Hostile Municipalities

In Liberty Temple Full Gospel Church, Inc. v. Village of Bolingbrook, No. 11C2173, 2012 WL 1230728 (N.D.Ill. Ap. 12, 2012), the court held that a church stated a claim whether the Village of Bolingbrook imposed a land use regulation that created a substantial burden on the plaintiff without demonstrating that doing so furthered a compelling government interest, and in the least restrictive means necessary, in violation of the Religious Land Use and Institutionalized Persons Act (“RLUIPA”). Before leasing the parcel in question, the church consulted the village zoning code and map and saw that the parcel had no zoning designation and was not partitioned from the zoning designation in which churches were explicitly permitted. Accordingly, the church was surprised when the village denied its application for a building permit and claimed the church would need a Special Use Permit (SUP). The village also claimed parking was inadequate, but later recanted this. When the church took its case to the mayor, he said that he “did not want any more churches in Bolingbrook” because “churches do not produce any tax revenue.” The mayor also said that “the village would not back any zoning ordinance allowing the church to operate at the site.” When the church sued, the court held that it was not “obligated to bang its head against a wall and apply for a permit it was told it would never get” as a precondition for litigation. The court held that there were enough facts for the jury “to find that the Village had no compelling reason to refuse to consider the drawings and the church’s building permit application, or to demand a SUP, and that doing so created a substantial burden upon the small congregation by forcing it to file suit and incur legal fees.”

In Roman Catholic Diocese of Rockville Centre, N.Y. v. Inc. Village of Old Westbury, Case No. 09 CV 5195, 2012 WL 1392365 (E.D.N.Y. Ap. 23, 2012), the court held that the diocese stated a claim against the village under the substantial burden prong of RLUIPA, as a result of enacting certain amendments to the Village Code called the Places of Worship (“POW”) law in the wake of another trial court ruling annulling the board of trustees’ denial of the diocese’s application for a special use permit to develop a cemetery. On appeal, the trial court’s ruling was reversed to the extent it directed the board to issue a special permit to the diocese upon remittitur. The appellate court found that the diocese’s proposed use was subject to environmental review. In this litigation, the diocese argued that defendants “abused virtually every device and mechanism available to prevent the development” of the cemetery for eight years. When the Board finally granted a special exception permit it contained conditions the diocese claimed made the project impractical and “unjustifiably more expensive.” The court granted the diocese’s motion to amend its pleading to assert that the conditions imposed by the resolution would significantly restrict the diocese’s use of their property for religious burial purposes and to allege that the resolution’s requirements were “imposed ... arbitrarily, capriciously, or unlawfully” in violation of RLUIPA’s “substantial burden” claim and the Free Exercise clause. The court likewise held that the diocese adequately alleged a claim under the equal terms prong of RLUIPA by claiming that it was subjected to more stringent setbacks, landscape and property maintenance requirements, and groundwater testing requirements than properties within the village used for secular purposes including golf courses, polo grounds and public gardens. Additionally, the court allowed the church to amend its pleading to claim an equal protection violation, a claim challenging the constitutionality of the POW law on its face, and a First Amendment retaliation claim; it granted absolute immunity to the public officials with respect to the POW law, but not the adoption of the resolution.

In Victory Center v. City of Kelso, No. 3:10-cv-5826-RBL, 2012 WL 1133643 (W.D. Wash. Ap. 4, 2012), the court ruled that the plaintiff stated a claim under the equal terms provision of RLUIPA against the defendant as to whether the plaintiff, “an entity arguably engaged in educational and cultural pursuits,” is treated on less than equal terms with secular educational and cultural institutions. The court said there was a question of fact whether all similarly situated secular organizations are barred from the area unless retail in character. The city decided that the plaintiff’s use of facilities was prohibited in the area as a community center, rather than permitted as a cultural and educational center. Nevertheless, the court rejected the plaintiff’s argument that the city’s zoning scheme substantially burdened the plaintiff’s religious exercise inasmuch as the plaintiff failed to advance any compelling reason why this particular location is better suited for its religious practices than any other. The court found that the city’s land use regulations do not constitute “more than an inconvenience on religious exercise” and do not offend the Free Exercise, Free Speech, Due Process or Equal Protection clauses, as they are neutral, generally applicable, equally disadvantage nonreligious entities, and because the plaintiff is not part of a suspect class. The court granted qualified immunity to Kelso city officials.

RFRA Is No Defense to Trademark Infringement

In General Conf. Corp. of Seventh-day Adventists v. McGill, No. 1:06-cv-01207 and 1:11-mc-00003, 2012 WL 1155465 (W.D. Tenn. Ap. 5, 2012), the court held that the Religious Freedom Restoration Act (“RFRA”) may not be used as a claim or defense in lawsuits between private parties. The defendant invoked RFRA as a defense against sanctions for trademark infringement. He admitted that he intended to continue creating websites and publishing information on the Internet that violated the court’s injunction and orders by referring to the “Creation Seventh Day Adventist Church,” notwithstanding that the plaintiff had a valid mark for “Seventh-day Adventist.” The court held the defendant in willful contempt, subject to civil fines, attorneys’ fees, costs and arrest, unless he timely submits a written report detailing the manner in which he has complied with the court’s order and injunction.

Plaintiffs Fail to State DFA and FCPA Claims against Convention for Overseas Missionary Practices

In Nollner v. Southern Baptist Convention, Inc., Nos. 3:12-cv-00040, 3:12-cv-00043, 2012 WL 1108923 (M.D. Tenn. Ap. 3, 2012), the court held that the plaintiffs failed to state a claim under the Dodd-Frank Wall Street Reform and Consumer Protection Act (“DFA”) against the Southern Baptist Convention. The International Mission Board of the Convention allegedly recruited the plaintiff to perform missionary-related work, including construction management, for a new office building in New Delhi, India. The assignment was allegedly for at least 24 months and included a “Spouse Assignment Description.” The plaintiffs sold all their assets and gave up their jobs in anticipation of the move. They alleged that the defendants hired a contractor and architect before they arrived without a competitive bidding process; that the workmanship and materials utilized were below standard; that the contractor and architect tried to bribe Mr. Nollner and were paying bribes to local officials; and that the defendants had received an illegal permit. They also alleged that Mr. Nollner reported these activities, and that after he refused to resign was terminated. The court held that the Foreign Corrupt Practices Act (“FCPA”) does not create a private right of action under the circumstances and that only the Department of Justice has jurisdiction over the defendants under the FCPA. Likewise, the court declined to interpret the DFA as extending its whistleblower protections to companies that otherwise have no relationship to the Securities Exchange Commission and that have not committed securities violations. Consequently, the court ruled that the plaintiffs could not state a DFA claim. The federal court declined to exercise supplemental jurisdiction over the state causes of action and remanded the state claims for breach of contract, promissory estoppel and retaliatory discharge to state court.

County Claims Church Daycare Should Not Be Tax-Exempt as Substantially Commercial

In Gloria Dei Lutheran Church v. Cnty. of Stearns, Case No. 73-CV-10-3660, 2012 WL 1161507 (Minn. Tax Regular Div. Ap. 3, 2012), the Minnesota Tax Court held that issues of fact existed precluding summary judgment as to whether the church was entitled to a property tax exemption for property used as a daycare and school that it acquired from a for-profit daycare adjacent to the church. The county argued that the daycare remained substantially commercial after the church acquired it and that the church was too slow to convert it to church purposes to qualify for the exemption; the church argued otherwise. Under Minnesota law, exempt property must be “devoted to and reasonably necessary to the accomplishment of church purposes.”

Religious Institutions in the News

Study shows Mormonism and Muslims are fastest-growing faiths in the United States. See: http://www.washingtonpost.com/national/on-faith/study-shows-mormonism-is-fastest-growing-faith-in-half-of-us-states/2012/05/01/gIQAhdQyuT_story.html. For the study, see: http://www.rcms2010.org/. For information about the debate about the methodology used, see: http://www.washingtonpost.com/national/on-faith/how-did-mormons-grow-so-fast-they-changed-how-they-counted/2012/05/04/gIQAErNm1T_story.html

A study shows so-called “millennials” drifting away from the religious affiliation of their childhood. See: http://publicreligion.org/research/2012/04/millennial-values-survey-2012/

The Vatican is chiding the Leadership Conference of Women Religious, the umbrella group for America’s Catholic nuns, as well as Catholic colleges, to ensure doctrinal consistency. See: http://www.latimes.com/news/nation/nationnow/la-na-nn-vatican-nuns-20120419,0,1801777.story; http://thericatholic.com/news/detail.html?sub_id=4978

The effect on campus religious groups of Christian Legal Society v. Martinez is reportedly pronounced. See: http://www.washingtonpost.com/national/on-faith/supreme-court-decision-on-religion-upends-campus-religious-groups/2012/05/09/gIQAyYElDU_story.html